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Libor Must Shift to Market-Pricing System, Say U.S. Regulators

Financial Stability Oversight Council says benchmark rates should be ‘anchored in observable transactions.’

Interest-rate benchmarks must be tied to market transactions instead of estimates to protect the global financial system against mis-allocation of capital and mismanagement of risk, according to a panel of U.S. regulators.

U.S. and overseas agencies must identify alternatives to the London interbank offered rate “that are anchored in observable transactions and are supported by appropriate governance structures,” the Financial Stability Oversight Council said in a report released today.

FSOC, a council of regulators created by the Dodd-Frank Act to monitor financial-system risk, made the recommendations after three banks paid $2.5 billion in fines in a global manipulation probe. The council, led by Treasury Secretary Jacob J. Lew, also includes Federal Reserve Chairman Ben S. Bernanke and heads of agencies such as the Securities and Exchange Commission, the Federal Deposit Insurance Corp. and the Commodity Futures Trading Commission.

The small number of transactions underpinning reference rates are hurting market integrity and raising concerns about financial stability, FSOC said in the report.

“While ongoing international efforts are necessary to remediate deficiencies in governance, they cannot address the insufficient number of transactions, particularly in longer tenors, in the unsecured interbank lending market,” the panel said in the report.

The investigation begun by the CFTC has uncovered widespread attempts by banks to rig Libor and other benchmarks for profit. Royal Bank of Scotland Group Plc, UBS AG, and Barclays Plc have been fined more than $2.5 billion in the Libor probe and at least a dozen more firms are still under investigation.

Bloomberg News

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